Real estate investors understand the necessity for investment diversification, which is why many of them are adding oil and gas to their portfolios. There also has never been a better time to invest, with many experts advising that buying opportunities for oil and gas today through 2018 are better than 2008 opportunities in the real estate market. With more than $1 trillion in large project cancelations, future demand for oil and gas consumption — which grows at a steady rate — is sure to be unmet, raising future prices.
However attractive the economics, generally speaking, it is hard for an individual investor to gain access to direct oil and gas investments. Yet, advances in crowdfunding technology and regulation, combined with climbing oil and gas prices, now offer an opportunity for savvy real estate investors to branch out. One energy crowdfunding platform is allowing investors to diversify, starting at $5,000, and has created a structure to pass through oil and gas tax benefits to investors.
These unique tax benefits came to pass when President Regan signed the Tax Reform Act of 1986, which recognized the high risk/high reward nature of oil and gas production. It authorized a binding one-time election to expense intangible drilling and development costs, which generally permits an immediate write-off of expenditures that would otherwise be capitalized and amortized.
Real estate investors typically are motivated by cash flow, tax benefits and equity. In addition to fulfilling these goals, direct investments in oil and gas projects also allow investors to:
- Take advantage of short-term tax benefits. Investors may see a near-
immediate return, whereas it could take decades to get the full tax benefit on real estate investments. For example, if you invest $100,000 in a property, you get to deduct $3,636 per year. Receiving the full tax benefit would take nearly 30 years. If you invest $100,000 in an oil and gas project with “intangible drilling costs,” you can deduct up to 80 percent of your investment, or about $80,000 in the first year. In the 35 percent to 39.6 percent tax brackets, this is equivalent to a 28 percent to 32 percent return in year one. You also would receive additional tax reduction benefits based on production values and depletion of the reserves.
- Diversify. In addition to being independent of the stock market, returns from these projects are not dependent on the economy, as is the case for the housing market.
- Less competition and quicker success. When investing in real estate, you compete against large, well-funded rivals, and it can take several years to determine if the investment is a success. In contrast, when investing in smaller oil and gas projects such as those available through crowdfunding, you are not competing against well-funded interests that target projects requiring tens of millions of dollars in investment capital.
- Reap the rewards of success. Direct investments in oil and gas projects can pay off big and generate revenue many times over drilling costs if the well is productive. This can result in cash flow from monthly or quarterly distributions for many years, with wells in the United States ranging in life from as few as five years to as many as 50 years.
Real estate investors should do their homework and speak with a financial adviser about oil and gas investment — it is a great fit for many portfolios.
Philip Racusin is the CEO of EnergyFunders.